When consolidating a subsidiary, why is goodwill recorded?

When consolidating a subsidiary, why is goodwill recorded?

• A. To reduce tax liability
• B. To record excess purchase price over net assets
• C. To comply with legal regulations
• D. To reflect historical cost

Answer: (B)

Goodwill is recorded during the consolidation of a subsidiary primarily because it represents the excess amount paid over the fair value of the identifiable net assets acquired in a business combination. When a parent company acquires a subsidiary, it often pays more than the fair value of the identifiable assets and liabilities. This excess payment can be attributed to various factors, such as the subsidiary's strong brand reputation, customer loyalty, proprietary technology, or anticipated synergies that will generate future economic benefits. This accounting treatment is in line with accounting standards, which require goodwill to be recognized when the purchase price exceeds the fair value of the identifiable net assets at the acquisition date. Goodwill is not a tangible asset; rather, it reflects intangible factors that create additional value for the parent company when consolidating the financial statements. The other options listed do not accurately describe the purpose of recording goodwill in the consolidation process.

Goodwill is recorded during the consolidation of a subsidiary primarily because it represents the excess amount paid over the fair value of the identifiable net assets acquired in a business combination. When a parent company acquires a subsidiary, it often pays more than the fair value of the identifiable assets and liabilities. This excess payment can be attributed to various factors, such as the subsidiary's strong brand reputation, customer loyalty, proprietary technology, or anticipated synergies that will generate future economic benefits.

This accounting treatment is in line with accounting standards, which require goodwill to be recognized when the purchase price exceeds the fair value of the identifiable net assets at the acquisition date. Goodwill is not a tangible asset; rather, it reflects intangible factors that create additional value for the parent company when consolidating the financial statements. The other options listed do not accurately describe the purpose of recording goodwill in the consolidation process.